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With over 30 years’ experience financial services, Conor is passionate about adding client value through trusted relationship management and loves building mutually valuable relationships.
Conor McCann from Amber River NI explains some of the key considerations family business owners need to be mindful of when planning an exit from the business.
Have you worked out your succession plan?
The first step to developing an exit strategy is to have a robust conversation about what you want to happen. The sooner you involve your accountant and financial planner to help you make the right decisions, the better.
For example, if you plan on passing on the business to one or more of your children, a shareholder’s agreement could help clarify your wishes and avoid any ‘Succession’ style family disputes that could occur further down the line.
The shareholder’s agreement can assign specific roles to members of the family, how you want the business to be structured, and how the shares in the business will be passed on to your children, while being mindful of the tax implications involved.
Different tax considerations
Any family business succession plans should have a strong element of tax planning included, as making a gift of shares in the business could result in a capital gains tax (CGT) liability or an inheritance tax (IHT) liability.
A CGT liability can occur where the gift of shares is considered the transfer of an asset, even if no sale has occurred. However, it’s possible to defer that capital gain until the recipient of the shares eventually sells them.
And gifting the shares can also trigger an IHT liability as the gift will be considered a ‘potentially exempt transfer’ for tax purposes. This means that if you die within seven years of making the gift, the value of the shares will likely be liable for IHT, and the person you gifted them to would have to pay the amount due.
Therefore, it’s important to be aware of these issues and to have conversations that determine the most tax-efficient approach to suit your needs.
Other tax planning arrangements
As well as exploring the best way to transfer shares to family members, we can also talk to you about reducing or eliminating a large IHT liability that could be created after the business is sold, an unfortunate occurrence that is more common than you might think.
Many family-owned businesses qualify for Business Relief, which allows a business to be passed down the generations without triggering an IHT bill. However, after the business is sold, Business Relief can no longer be claimed, and the proceeds of the sale could become part of your taxable estate, resulting in a higher IHT bill than you had been expecting.
In these situations, we can recommend estate planning strategies that let you invest the proceeds from the sale into other companies that still qualify for Business Relief. Provided the proceeds are invested within three years, the amount invested becomes IHT-free and it can be therefore left to beneficiaries without triggering an IHT bill.
Selling the business
If you decide to sell your stake in the business completely, it’s important to establish the amount of CGT you will be required to pay on the proceeds of the business sale.
You should also have a discussion about Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief), because claiming this would allow you to pay CGT at the reduced rate of 10% compared to 20% on gains from chargeable assets.
Again, this is an area where getting professional advice can make a significant difference to the amount of tax you are required to pay.
Talk to Amber River
Here at Amber River, we have considerable experience of working with family business owners looking to exit the business, either by passing it down to future generations or selling in its entirety.
We can help make sure you understand the particular risks associated with the Business Relief schemes mentioned above and you’re comfortable with them before you invest. Remember that the value of an investment may go down as well as up and investors may not get back what they originally put in. Tax rules may change in the future, and the value of tax reliefs depends on your individual circumstances.
We also make a point of being closely involved with the business owner and their accountants and solicitors, because we see it as our role to help create a fully aligned approach that gives you the benefit of our tax-planning advice and recommendations, while incorporating the other key financial aspects of the business itself.
Get in touch
If you’re in Northern Ireland and you’d like to talk to us about your own business exit strategy, call Amber River NI on 02896 227352 or get in touch via the contact form.
If you are based in another part of the country and want to arrange an appointment with an Amber River financial planner in your area, please call 0800 915 0000, or alternatively use our contact form here.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
